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What is "commercially reasonable"?

A recent English High Court decision (1) has held that it was commercially reasonable for a bank to withhold its consent to an early termination of loan securitisations unless it received five years' fees.

The Court found that the applicable standard was an objective standard of whether a reasonable commercial man in the bank's position might have made such a decision. While an objective standard of reasonableness has long been accepted in landlord and tenant cases, it has only recently been applied in a commercial setting, and this is the first time it has been applied in a finance setting.

The objective standard of reasonableness did not require the bank to justify its decision nor conduct a balancing exercise between its interests and the other party's. The bank's commercial interest was earning profits from its fee income under the securitisation documents; it was entitled to take into account its own commercial interests in preference to those of the other party. On the facts, five years' fees was held to be a reasonable condition to the grant of consent.

In coming to its decision, the Court found that the choice of the words "commercially reasonable" was relevant. By using express words, the parties were seeking to achieve some greater restriction, not an unfettered discretion. The breadth of the discretion permitted the bank to exercise its discretion to protect its own commercial interests. In particular, the use of the adverb "commercially" reinforced the concept of objective reasonableness, more so than the concept of rationality.

This case will be relevant for those involved in finance transactions, where it is common to include a provision where one party requires the consent of the other, with discretion to be exercised in a reasonable manner. As this is the first case involving a finance transaction, the decision may indicate a shift in attitude towards the interpretation of clauses requiring "reasonableness". It also highlights the importance of choosing nuanced language to accurately reflect the intention of the parties, wherever possible.